What’s at Stake in the Elon Musk Compensation Vote?

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To pay or not to pay? That is the question facing Tesla shareholders this Thursday when they vote yea or nea on a $56 billion pay package for CEO Elon Musk.

The decision is generating lots of headlines – largely because the first deal was struck down by a Delaware court in January, setting up a rematch as Musk takes on activist and institutional investors plus proxy advisory firms in a battle for investor hearts and minds. Who doesn’t love a good scuffle?

But it’s more than the lurid appeal of conflict. The issues at play get to the heart of modern capitalism: How important is one man to an organization’s fortunes? Who creates value in a business? Who calls the shots in a publicly traded company? What defines shareholder value in tech? And how much is enough when it comes to executive compensation?

Shareholders will be grappling with more earthly concerns: how will the deal affect their current holdings, future gains, and potential dividends? Other CEOs will be watching to see how much influence investors can have on their hefty pay stubs.

We consider the evidence, examine the issues, and lay out the opposing arguments.

Key Takeaways

  • Tesla CEO Elon Musk is asking shareholders to re-ratify his 2018 executive compensation package, encompassing $56 billion in stock options.
  • Despite nearly three-quarters voting in favor of the deal previously, it was struck down in January by a court in Delaware.
  • Musk wants shareholders to have their say again and to move the company’s legal incorporation from Delaware to Texas, which he sees as more business-friendly.
  • The vote takes place against a backdrop of slowing EV sales and warnings that Tesla’s stock price could tumble further if Musk is seen to be sidelined.

The Spotlight’s Glare

Big money deals are hardly an anomaly in the tech sector. Why the intense interest in this one? For the answer, look to the man.

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Musk has placed himself at the center of almost every major tech trend, from ushering in the EV age, accelerating the transition to renewables, altering the future of public transport, launching a new era of space exploration, hyping crypto, reshaping social media, advancing AI, or sending convertible Tesla Roadsters into orbit, he’s continually drawn the spotlight.

He’s a skilled self-promoter. He’s also an incredible entrepreneurial force. That inevitably creates fans and haters. Tony Stark comparisons on one side, accusations of hubris, greed and other ad hominems on the other.

The judge who struck down the deal said Musk had ‘improperly’ dominated the board negotiations that agreed on it and described the amount as ‘unfathomable.’

This week will determine if he can convince an increasingly skeptical audience of big investors to back him again, and set the stage for a likely challenge to the Delaware ruling.

How Did We Get Here?

In January, Delaware judge Kathaleen McCormick nullified a pay deal that would have awarded Musk options on 304 million Tesla shares, exercisable at $23.33 each, well below TSLA stock’s current price of $173.79 as the market closed on June 10, 2024.

The options were broken out into 12 tranches, each worth around 1% of Tesla’s equity. To receive all 12, the company would need to hit an escalating series of operational and financial goals under Musk’s leadership. All have now vested.

The deal was challenged by activist investor Richard Tornetta, who sued to quash it in 2018. At the time, Tornetta owned just nine Tesla shares. He claimed the amount was excessive and that shareholders hadn’t been given enough information about how easily the performance goals set out in the agreement could be achieved. The agreement didn’t guarantee Musk a salary.

In 2022, Amit Batish of executive pay firm Equilar calculated the package was bigger than the combined pay of the 200 highest-paid US executives — multiplied by six. It would be 300 times what America’s best-paid CEO earned in 2023 ($162 million).

On Thursday, June 13th, Tesla shareholders will vote to ratify the deal again — or deny it.

Critics Call the Deal ‘Disproportionate’

For naysayers, the main issue is the size of the deal itself. The Wall Street Journal called it ‘disproportionate in every way,’ noting the amount is more than double the annual cash flow the company is expected to generate this year ($22.5 billion).

It’s also equal to about 10% of Tesla’s market cap of $539 billion as of June 11, 2024. Crucially for the Thursday vote, barring a surge in stock price, shareholders will find their holdings diluted once Musk exercises his options.

Critics also balk at the additional power the deal could give Musk in boardroom decisions. He currently owns around 13% of the company and has said publicly that he wants at least 25% of the firm’s voting shares. The options in the pay package would move him closer to that goal.

Influential proxy advisory firm Glass Lewis lambasted the deal in May with a 71-page report that urged shareholders to say no. Calling the $56 billion pay award ‘excessive,’ the firm also worried that the package would effectively hand control over Tesla to Musk. Re-incorporating in Texas would also be a mistake, the report said, as Texas business courts are overstretched and lack experience in complex matters.

The firm also took issue with Musk’s many ‘time-consuming business projects,’ which could distract his attention from running Tesla effectively. It also shot down a plan to re-elect his brother Kimball onto Tesla’s board, which would further cement his power over decision-making.

Supporters Say ‘He Earned His Pay’

For Musk’s backers, the issue is the outsized impact Tesla’s CEO has had on both the company’s and investors’ fortunes. Musk is special, they say, and should be compensated in a special way.

“Elon is not a normal executive, and Tesla is not a normal company.” wrote Tesla Chairwoman (and shareholder) Robyn Denholm in a June 5th letter to Tesla investors.

She and other members of Tesla’s board defended the pay package as a mechanism to align Musk’s incentives with shareholders and keep him focused on the company, noting that Musk has not received any compensation other than the stock options and would have received nothing if Tesla hadn’t hit its targets.

In her letter, Denholm goes on to say that Musk’s contributions to Tesla ‘should be respected.’ She said:

“Elon’s unique contributions have built Tesla from a company that was, in 2018, a loss-making, ambitious company with significant hurdles and challenges to overcome into what it is today — a company that is literally changing the world by driving so many critical initiatives that are making our planet more sustainable while at the same time delivering hundreds of billions of dollars of value to all of you who invested in Tesla’s dream.”

That view is supported by billionaire investor Ron Baron, chairman and CEO of Baron Capital, which holds Tesla stock. In an open letter published last week he wrote that the pay package should be approved by shareholders on the back of Musk’s accomplishments and appreciation Tesla’s stock price has seen under his tenure.

“Tesla is better with Elon. Tesla is Elon.”

Let the Numbers Speak for Themselves

If you look at Tesla’s stock trajectory, it’s hard to argue against the scale of Musk’s contribution. From a market capitalization of $56.8 billion in 2018 to over a trillion in 2021, and even at today’s $539 billion, the company has grown massively since the executive compensation deal was agreed.

Tesla Market Cap History, 2010-2024

Of course, he didn’t do it alone. From engineering to operations, finance, and corporate leadership, Tesla employees and executives are the best and brightest. But can any of them claim to be the driving force behind the company’s fortunes?

Tesla Chair Denholm says the company has an ‘Everest to climb‘ in order to win the vote, as restive shareholders worry about Tesla’s stock price, slowing sales, and the growing threat of Chinese EVs.

The Bottom Line

Even if Musk is successful on Thursday, it may just signal that the next phase of the battle is about to begin.

A pro-Musk vote by shareholders can’t overturn a US court’s ruling. It might, however, provide just the evidentiary ammunition Musk needs for a legal appeal or rehearing of the original case.

FAQs

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Mark De Wolf
Tech Writer
Mark De Wolf
Tech Writer

Mark is a freelance tech journalist covering software, cybersecurity, and SaaS. His work has appeared in Dow Jones, The Telegraph, SC Magazine, Strategy, InfoWorld, Redshift, and The Startup. He graduated from the Ryerson University School of Journalism with honors where he studied under senior reporters from The New York Times, BBC, and Toronto Star, and paid his way through uni as a jobbing advertising copywriter. In addition, Mark has been an external communications advisor for tech startups and scale-ups, supporting them from launch to successful exit. Success stories include SignRequest (acquired by Box), Zeigo (acquired by Schneider Electric), Prevero (acquired…